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New study highlights potential costs to US of NAFTA withdrawal

Origin Calculation | 23 May 2018

A new US industry report has warned of the potentially significant costs to the American economy if the country withdraws from the North American Free Trade Agreement.

It has now been nine months since the US, Canada and Mexico began high-stakes talks aimed at renegotiating the North American Free Trade Agreement (NAFTA), the trilateral trade deal that has become a lightning rod for controversy in recent years.

Regularly criticized by US president Donald Trump for its perceived negative impact on US industry and the jobs market, the deal has been subjected to considerable scrutiny as the three nations seek to find a new compromise that appeases the protectionist instincts of the Trump administration, and staves off the repeated threat of complete US withdrawal from the pact.

However, progress on these talks has been slow, and it is looking increasingly likely that a new settlement will not be reached this year. Against this backdrop, American business community leaders have issued warnings against any policy that would take the US out of NAFTA, highlighting concerns that this would damage many of the industries that such a move would be intended to protect.

The economic impact

An AT Kearney study commissioned by the National Retail Federation (NRF), the Retail Industry Leaders Association and the Food Marketing Institute has indicated that the US ending its involvement with NAFTA would cost retailers and consumers up to $16 billion (€13.57 billion) annually over the next three years.

As of 2017, US retailers imported $128 billion worth of merchandise from Mexico and $54 billion from Canada, thanks in large part to the elimination of trade tariffs on most of those goods since NAFTA took effect in 1994. Withdrawing from NAFTA would therefore likely subject retail imports to $5.3 billion in annual tariffs.

Food and beverages sold at grocery stores would experience the most significant impact, with a $2.7 billion tariff bill, followed by apparel and footwear at $501 million, electronics and appliances at $390 million, household goods at $498 million and auto parts at $240 million. The remainder would come from knock-on cost increases for services such as transportation.

Broader cultural implications

However, the impact of a US NAFTA withdrawal would go beyond the basic economic figures. Of particular concern to the industry bodies behind this new report is the fact that most of these costs are likely to be passed along to customers in the form of higher prices, damaging consumer confidence, creating hardship and reducing overall demand.

Even with these tariffs passed on, retailers would therefore still see a $10.5 billion reduction to their bottom lines, resulting in 68,000 retail jobs going unfilled, while another 60,000 jobs supported by the retail industry would be lost, for an overall total of 128,000 job losses over a three-year period.

The report also touched upon the wider cultural implications of these trends, noting that US grocery shoppers would no longer have access to the same range of fresh, healthy goods and seasonal produce made possible by the current interconnectedness of the three NAFTA economies. This could lead to broader public health and food safety issues, underlining the potentially wide-ranging impact the collapse of the NAFTA deal could have.

NRF president and chief executive Matthew Shay said: "It's clear NAFTA must be modernized, but we can't lose sight of the fact that this agreement helps ensure that American families have access to products they need at prices they can afford.

"As this report shows, withdrawing from NAFTA would jeopardize countless US jobs and force consumers to pay more everyday products like groceries and blue jeans."

The NAFTA renegotiation process is still ongoing, with forthcoming elections in Mexico and the US meaning that a resolution is now unlikely to be reached until 2019. Significant differences continue to persist between the negotiating positions of the US and its partners, meaning any agreement is likely to be hard-fought; US industry leaders will therefore be hoping they can convince the Trump administration of the benefits of sticking with the deal over the coming months.